Question

Utility Problem Set #5H

Moe likes to visit a local establishment to consume pizza and beer. He has $16 in his pocket and plans to spend it all tonight. When he arrives at this establishment tonight he see the regular price for a draft beer is $4 and a slice of pizza is also $2 per slice.

On a napkin he sketches out the following information:

Qty of Beer	TU	MU	MUb/Pb	Pizza slices	TU	MU	MUs/Ps
1	100			1		60
2	190			2		40
3	270			3		30
4	340			4		25
5	400			5		20
6	440			6		15
7	470			7		10
8	490			8		5

1. Complete the chart for Moe given the above information (10 points)

2)

i) Does Moe follow the law of diminishing marginal utility for beer?

ii) Does Moe follow the law of diminishing marginal utility for slices of pizza?

(1pt)

3. What combination of beer and pizza should Moe purchase tonight in order to maximize his utility? (3pts)

4. What is Moe’s total utility or total satisfaction from consuming the above combination of beer and pizza? (1pt)

Moe returns the next night to this establishment. He walks with his customary $16 in his pocket and notices that the establishment is having happy hour prices on draft beer. A draft is now $2. The price of a slice is still $2 per slice.

5. Using the information below concerning Moe’s tastes, fill in the blanks and find the combination of beer and pizza slice will maximize Moe’s utility tonight.(2pts)

Qty of Beer	TU	MU	MUb/Pb	Pizza slices	TU	MU	MUs/Ps
1	100			1		60
2	190			2		40
3	270			3		30
4	340			4		25
5	400			5		20
6	440			6		15
7	470			7		10
8	490			8		5

6. What is Moe’s total utility or total satisfaction from consuming the above combination of beer and pizza? (1pt)

7) Draw Moe’s demand curve for beer. Be sure to label all axes and curves. (2 pts)

Answer 1

2) i) yes Moe follows the law of diminishing marginal utility for beer. Law of diminishing marginal utility staes that when we consume more and more units of a good at a continuous basis then our marginal utility derived from the additional unit declines, which is evident from the table in question 1.

ii) yes Moe follows the law of diminishing marginal utility for pizza.

7) Diagram of the demand curve